Richard Willsher
Richard Willsher

Singapore Where electronic FX is moving towards critical mass

Asia Pacific’s principal FX trading centre is increasingly demonstrating what happens when market forces, technology, regulatory support, regional political events and positive sentiment all align. Richard Willsher investigates.

First Published: e-Forex Magazine 98 / Regional eFX Perspective / June 2020

The city-state of Singapore with just five and half million people punches well above its weight in FX. In terms of average daily turnover, the Bank for International Settlements’ 2019 Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets reports average daily trading volume of USD640 billion, placing it third after London and New York. It outdistances other Asia Pacific centres including Tokyo, Hong Kong and Sydney in most, though not all, types of transaction including spot, outright forwards, FX swaps currency swaps and FX options across a broad range of G10 and emerging markets currencies. Moreover, as successive BIS surveys have shown, Singapore continues to grow its turnover period after period in line with the general global FX turnover growth trend. It now accounts for almost eight per cent of global OTC turnover and roughly a third of that of the APAC region.

Singapore has positioned itself at the convergence of several significant eFX growth drivers. “Singapore has around USD2.5 trillion of assets under management (AUM) with 75% sourced from outside Singapore,” explains Jay Hurley, Regional Head of eFX, APAC at State Street Global Markets, one of the world’s largest custodians. “With AUM in the APAC region expected to grow to 30 trillion USD by 2025, State Street is positioning itself to meet the increased demands for its transaction services.”

Regional Spotlight
Turnover of OTC foreign exchange instruments, by country in USD billion
Courtesy of: “Bank for International Settlements’ Central Bank Survey of Foreign Exchange and Over-the-counter
(OTC) Derivatives Markets in 2019.” Reported on a net-gross basis, daily averages, in billions of US dollars

On the corporate side, Singapore sits at the heart of Asia, where increasing international trade is speeding up demand for more sophisticated FX instruments. Singapore is home to a significant number of regional corporate treasuries. Many of these have already adopted electronic FX trading and are increasingly pursuing best execution technology that e-trading can enable. 

At the same time, as BNP Paribas has pointed out in a recent announcement about its expanded Singapore operation, in the highly dynamic FX market, access to data and artificial intelligence (AI) tools can mean having an edge in trading strategy. The banks new FX pricing and trading engine will offer e-FX trading of 50 currencies in spot, forward, swaps, non- deliverable forwards (NDFs) and options, as well as commodities e-trading for both precious and base metals.

Banking on technology

This highlights twin trends in Singapore’s growth, firstly the adoption of cutting edge technology and secondly its success in attracting new market activity through encouraging international players to increase their e-FX presence there. Both of these have been promoted by the Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory authority. So far nine institutions have committed to the MAS initiative: BNY Mellon, BNP Paribas, Citi, Deutsche Bank, J.P. Morgan, Jump Trading, Standard Chartered, UBS and XTX Markets.

At the launch of its pricing and trading engine in January 2020, BNP Paribas said, “Singapore is a key trading centre for us in Asia Pacific, where we are committed to investing for growth. In Southeast Asia, we have seen our e-FX trading volumes grow by double-digits year-on-year. With the new e-FX Hub in Singapore, our clients will benefit from better access to liquidity, more efficient price discovery and timelier trade execution. Working with MAS on this initiative underscores Singapore’s focus on improving market efficiency and the sector’s growth potential in the region.”

Regional Spotlight
Singapore sits at the heart of Asia, where increasing international trade is speeding up demand for more sophisticated FX instruments
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Sudhanshu Sanadhya

“With market volumes and volatility at record levels, we’re pleased to provide clients with additional infrastructure to support their global price discovery and liquidity needs.”

Other major banks have made a similar commitment. Standard Chartered Bank’s Michele Wee, Head of Financial Markets, Singapore, Brunei and Australia, says that it is an early entrant to partake in this development with the go-live of its Singapore co-location capability in December 2019. “Standard Chartered executed its first trade in January 2020,” she continues, “This investment came soon after the Singapore franchise became the first foreign bank to consolidate all our businesses into a locally-incorporated subsidiary. As one of the largest banking organisations and a major FX trader in the region, we are committed to continue investing in Singapore.”

At the beginning of April, J.P. Morgan said that it had successfully completed its first trades, following successful testing of a new trading and pricing engine in Singapore. “With market volumes and volatility at record levels, we’re pleased to provide clients with additional infrastructure to support their global price discovery and liquidity needs at such a critical juncture,” commented Sudhanshu Sanadhya, the bank’s head of Asia currencies and emerging markets trading. “Clients benefit from the reduced latency in trade execution and greater price transparency via the platform. It allows clients to conduct FX transactions effectively according to their geographical location and is J.P. Morgan’s fourth electronic FX trading infrastructure globally, adding to its existing platforms in New York, London and Tokyo. The additional infrastructure also enables us to handle larger volumes and provides us with greater interoperability.”

On 3rd June BNY Mellon, joined the lengthening list of firms to announce plans to build a high-performance FX pricing and trading engine in partnership with MAS. “The bank will establish new low-latency electronic FX infrastructure in Singapore,” they stated, “helping to improve execution quality and price discovery for clients, initially in spot and subsequently in deliverable and non-deliverable forwards and swaps. We’ve spent the past four years fully integrating and accentuating our global FX capabilities, and this is just the next step in the bank’s commitment to the region, specifically to Singapore as the hub of our Asia G10 FX trading. With the benefit of local support, we can accelerate our offering of additive liquidity to clients.”

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Jonathan Woodward

“Data rates and trading rates tripled during February and March but our systems stood up well.”

Individual banks are not the only organisations to beat a renewed path to Singapore’s door. Multi-bank platform Refinitiv has also announced a significant development. “We’ve set up a new legal entity in Singapore for all our non-MiFID [Markets in Financial Instruments Directive – European regulation] business, basically,” Jonathan Woodward Refinitiv’s Head of Asia Pacific - Transactions Sales. “This means we are now a MAS regulated market operator and can do more, such as switch on our metals derivatives business.”

While maintaining its APAC technology base in Tokyo, Refinitiv is increasingly using its Singapore base as a springboard into other Southeast Asian (ASEAN) countries. It is working closely with authorities in Malaysia, Indonesia, India and Vietnam among others to bring its electronic platform into wider use. This not only expands its business but also aids central banks and regulatory authorities to supervise and control their currencies through the use of its technology and data transparency.

Covid-19

E-trading technology has played a crucial market role during the current pandemic. Although Singapore has had relatively few cases, it was quick to react and move to home trading. In a widely-wired jurisdiction, this was done quite smoothly as Jason Wang COO at Spark Systems, a leading regional FX trading technology provider, explains. “We saw in March how FX volume numbers went through the roof but it’s safe to assume that FX trading activity hasn’t reduced or been affected by the COVID-19 situation. People adapt, and quite quickly too. Banks here in Singapore have their sales and trading teams split up between the office and home, and life / work goes on. This is also aided by the fact that many active FX traders here are already trading using online platforms.”

As Ravi Menon, Managing Director of MAS, observed in Financial Markets Association ACI Singapore industry event on 29 May 2020, “FX and treasury has been one of the better performing segments in the financial industry.” He added that “Singapore’s FX market has been resilient (as) it was able to manage the volatility from the global impact of COVID-19.”. 

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Jason Wang

“As the world goes more digital, accelerated by the [Corona] virus, Singapore will host more FX related IT infrastructure, servers and services.”

This view is endorsed by Refinitiv’s Jonathan Woodward though he concedes that Covid had some major market impacts. “Data rates and trading rates tripled during February and March. But the nice thing was all our systems stood up well and we didn’t have any issues with them. We know that some others struggled to cope with the throughput and disappeared for a while, but that wasn’t the case with us. 

A lot of the banks reduced their internalisation rates because they were in a risk-off environment. So, that meant that they were just looking at passing through client flow straight into the primary markets. Consequently, primary market volumes tripled during February/March. We benefited from that. Asset managers were doing a lot of rebalancing and hedging. Banks were putting a lot of prices out there due to the volatility, so the update rates coming from the liquidity providers tripled. Therefore the market data throughput tripled, not just into the trading systems but also into our normal market data network. So, it was a period of intense activity for a lot of people.”

Woodward goes on to explain that home working and social distancing have meant greater electronification of flow. “A lot of flow was already electronic, say 75 per cent, but of that remaining 25 per cent, we’ve seen a lot more of that become electronic because both sides of the trade need it to be. We recently surveyed over 1,000 customers, 30% of whom cited communicating with colleagues as their biggest challenge with a further 19% citing communicating with their counterparties. This all points to the need for electronification.” The downside has been felt by voice brokers and those reliant on office environments to trade however. Covid has accentuated the trend towards e-trading. 

On the day-to day practical level, Covid-19 has changed buy-side dealing behaviour according to State Street’s Jay Hurley. “Clients that are working from home have increasingly turned to executing orders using algorithmic trading where the execution can be tracked in real time electronically,” he explains. “State Street has a sophisticated algorithmic trading suite for clients backed by deep liquidity to give confidence when executing in volatile markets. The impact on eFX trading has been minimal as people with operational oversight of the systems have been able to be split between working in the main office, working from home and disaster recovery sites.” 

Regional Spotlight
Singapore is home to a significant number of regional corporate treasuries

Beyond Covid

For the time being, Covid 19 is still a factor in Singapore as elsewhere. Home working remains widespread, mass returns to offices seem some way off but what then? What is the longer-term outlook for e-FX in Singapore?

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Michele Wee

“As more and more banks set up matching and pricing engines in Singapore, we can expect more ASEAN domiciled clients to move their e-FX trading to Singapore from other data centres.”

Refinitiv’s Jonathan Woodward admits to being more pessimistic than many. “April and May have been much quieter than 2019 averages, and there’s a very mixed view as to what’s going to happen in Q3/Q4 from a broader economy point of view. I think that the economies are going to take a massive hit for the rest of the year. It will take everybody a long time to get back to work and start spending, and I think corporate revenues and funding flows and everything else are going to be markedly down for the next 12 months. We have some people trying to talk it up and say that they see Q3 returning to 2019 levels, and Q4 being more active, but I’m doubtful, personally. Whatever the shape of the recovery, Singapore is well positioned geographically and technologically whilst providing an enticing market environment for eFX.” As we’ve seen, Refinitiv is gearing to make significant in-roads in markets across the region with Singapore at the hub of its ASEAN and Indian expansion.

At J.P. Morgan, Sudhanshu Sanadhya says that e-FX is a basic building block for managing a multi-currency assets/ liabilities portfolio. He is upbeat about the longer-term outlook. “Having such a functionality just opens up a path for further innovations and efficient markets. We’ve been seeing a trend of increased trading flows in Asia’s leading FX trading centre for some time now, which has only accelerated in recent months. We expect the market to grow substantially over the coming years.”

Jason Wang at Spark Systems echoes this view, “While I don’t have a crystal ball, my guess is that Singapore will continue to grow as an FX centre, attracting more bank desks, whether buy-side or sell-side, to setup here. And, as the world goes more digital, accelerated by the virus, Singapore will also host more FX related IT infrastructure, servers and services.” 

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Jay Hurley

“The impact on eFX trading has been minimal as people with operational oversight of the systems have been able to be split between working in the main office, working from home and disaster recovery sites.”

Standard Chartered’s Michele Wee is even more upbeat. “As more and more banks set up matching and pricing engines in Singapore, we can expect more ASEAN domiciled clients to move their e-FX trading to Singapore from other data centres, such as Tokyo and London. This will have a direct and positive impact on improved latency and pricing, as well as increased trading flows for e-FX trading in Singapore. We are also seeing more of our ASEAN-based clients adopt electronic trading and this will continue to drive organic growth.” 

She is equally sure about the general outlook for e-trading. “The trajectory for more global adoption of e-trading across all client segments remains a positive one. Regulatory requirements as well as the efficiency and productivity of trade execution are key drivers for market participants to move from voice to electronic trading. No matter where one is in the e-trading journey, the transition from trading vanilla products to trading more exotic products is inevitable.” 

Future outlook

Finally, State Street’s Jay Hurley, is quietly sure of the path ahead. “The outlook for Singapore as a regional hub for FX trading is positive. Singapore has been a growth location for FX over the last decade. Singapore’s pro-business environment and growing e-trading ecosystem will continue to attract buy-side, sell-side and platforms to the country.”

And this is very much to the point when it comes to reasons for Singapore’s continuing growth and success in e-FX. Well regulated and with strong take up of the FX Global Code, MAS is promoting Singapore not only as a pricing and trading centre but also as a node of technology excellence. Link the two and you have a powerful engine for future growth. Meanwhile, with events in Hong Kong unfolding rapidly in a direction that may not suit international finance sector firms, Singapore presents a haven of good order and efficiency. At the same time, India and ASEAN countries increasingly look to Singapore as their regional finance hub. All of these factors lend credence to the outlook for Singapore as the largest e-FX centre in its time zone with the willingness to open hours that smooth the passage of 24-hour global money flows through London and New York. This is a role that Singapore has successfully developed for itself and which it will increasingly perform.

Regional Spotlight
With events in Hong Kong unfolding rapidly in a direction that may not suit international finance sector firms, Singapore presents a haven of good order and efficiency

On-exchange in Singapore

SGX – the Singapore Exchange - is Asia’s largest and fastest-growing FX exchange, and the largest international RMB futures market that supports China’s internationalisation of RMB.

Singapore

K. C. Lam

“Banks are recognising Singapore as the largest FX centre in Asia, where it is a critical source of liquidity and the centre for price formation for both OTC and listed FX.”

Although, OTC markets currently dominate FX trading, with global regulatory developments, this looks set to change as market participants seek more cost-efficient and transparent ways to trade FX. “The trend towards the convergence of the OTC markets and listed FX markets has spurred SGX to develop innovative products like our FlexC futures which have been gaining momentum,” explains K. C. Lam, SGX Head of FX and Rates. “The first-of-its-kind FlexC FX futures product offering, brings together the flexibility of OTC FX with the capital efficiency and surety of centrally cleared futures. SGX FlexC FX futures went live in 2018 and in terms of cumulative volume have since traded US$285.2 million as at end-May 2020, with increasing interest from clients.”

With the outbreak of Covid, there was a rush to hedge currency exposures which saw a leap in SGX product volumes. “At the peak of the COVID-19 driven market volatility in March, SGX’s aggregate FX Futures volume jumped 58% year-on-year (y-o-y) to 2.97 million contracts. In U.S. dollar terms, this was at US$171.5 billion (up 72% y-o-y), its highest level ever,” says Lam. “The increased volumes were driven by INR and CNH contracts, which saw significant increase in hedging activity as commodity traders and asset managers managed currency exposure to protect the value of their assets. More recently, on 4 June, SGX saw record open interest in its USD/CNH futures at US$8.7 billion, on the back of escalating U.S.-China tensions.” 

SGX adds to Singapore’s rich and ever more comprehensive e-FX landscape.  “Banks are recognising Singapore as the largest FX centre in Asia, where it is a critical source of liquidity and the centre for price formation for both OTC and listed FX. This also mutually reinforces and further solidifies SGX’s position as the world’s premier venue for Asian FX futures,” K. C. Lam concludes.

MAS - the catalyst for e-FX developments in Singapore

The Monetary Authority of Singapore (MAS) has been a vital catalyst in the successful development of e-FX in the island. Its vision continues to propel the future of the market, as MAS outlined to e-Forex.

e-Forex: What is MAS’ vision for Singapore as a centre for electronic FX trading? 

MAS: MAS has been working with industry towards our vision of developing a Smart Financial Centre in Singapore, where innovation is pervasive, and technology is used widely to increase efficiency, manage risks better, create new opportunities, and improve people’s lives. This vision underpins our strategy to develop Singapore as a global eFX centre in the Asian trading hours, and we are constantly on the lookout for innovative ideas and solutions to support our FX markets.

e-Forex: How has the market responded so far? 

MAS: Today, Singapore has a diversified base of FX players, including a good critical mass amongst the top 20 global FX players, which have chosen to set up their pricing and trading engines here. Going forward, beyond the global banks, we are keen to see more regional banks, asset managers, funds, and brokerages take advantage of the infrastructure in place and take liquidity from the growing ecosystem in Singapore to benefit from better execution. 

Market participants have provided feedback that MAS’ initiative to grow the FX e-trading ecosystem, by attracting key liquidity providers and platforms to base their pricing and matching engines in Singapore, has been strategic and benefitted regional market participants especially during this volatile period in the last few months.

The liquidity providers that have set up their pricing and trading engines in Singapore have also provided feedback that their clients have seen better execution quality with tighter pricings, higher trade fill ratios, and lower rejection rates.

e-Forex: How far have firms under your supervision progressed with adopting FX Global Code?

MAS: In Singapore, the Singapore Foreign Exchange Market Committee (SFEMC), which is co-chaired by MAS, oversees the adoption of the FX Global Code among FX market participants. To encourage adoption, SFEMC launched its Public Register on the SFEMC website in January 2019. The SFEMC Public Register has also been admitted into the Global Index of Registers. There are 75 Statements of Commitment (SOCs) posted on the Public Register, including both sell-side and buy-side market participants, and comprising a significant proportion of banks in Singapore. As at end-2019, all SFEMC members (both sell-side and buy-side, as well as MAS) had posted their SOCs on the Public Register. 

In addition to reaching out to banks from the Association of Banks in Singapore (ABS), SFEMC has undertaken active outreach to the buy-side community in Singapore via conferences and industry events, to raise awareness on the FX Global Code, and to encourage buy-side adoption.  

e-Forex: Lastly, how is MAS harnessing new technology in pursuit of your vision?

MAS: In the area of non-traditional FX FinTech players, we are keen to support FX start-ups that can provide a wider range of product offerings. These include areas such FX options, beyond traditional offerings in FX Spot, Swaps, and NDFs, as well as other innovative FX solutions. 

For example, MAS has supported a start-up multi-dealer FX Options e-trading platform, Synoption, which aims to provide more transparent and efficient pricing of FX options to institutional investors, banks, and the buy-side community in the Singapore and Asia-Pacific markets. 

MAS has also supported Platinum Analytics, an electronic connecting network, which aims to connect Chinese FX liquidity with global players. Another FX start-up we’ve supported is Spark Systems, a Singapore-based FinTech company that provides high-tech solutions for FX trading. Spark has grown significantly over the past few years and have financial backing from investors such as HSBC, Citigroup, Goldman Sachs and Dymon Asia.